Winter 2001
Employee Theft: Chipping Away at Your Bottom Line

Employee theft and shoplifting cost America’s retailers more than $20 billion a year—that’s nearly $55 million a day. A 1999 survey of 11,202 retail stores conducted by Jack L. Hayes International revealed that only 4.13 percent of those shoplifting losses were ever recovered.

What’s even more startling is that nearly half of these losses, or $10 billion annually, are the direct result of employee theft. In fact, according to the 1996 National Retail Security Survey conducted by the Security Research Project at the University of Florida, respondents reported an average loss of $142.49 per shoplifting incident, compared to $737.31 per employee theft incident. The bottom line: employee theft can kill an otherwise successful retail business.

The theft triangle

To combat employee theft, you must understand the three elements of the “theft triangle”: need, willingness and opportunity.

Need is the motivating factor that causes someone to rationalize stealing from the employer. Need may be as complex and compelling as the need to feed one’s family.

Or it may be as simple as the “need” to own that hot new CD or that cool new lipstick. It doesn’t matter whether you or anyone “understands” the individual’s need or considers it worthy: “need” as that person experiences it is the driving force.

Once a need has been established, there must be a willingness to steal. To be willing to steal, the employee must first justify the theft in his own mind: he might reason that he’s underpaid and worth more, or that the company somehow cheated him, and/or that the company expects some degree of theft and is insured for it. Again, that “justification” doesn’t have to make sense to anyone but that individual.

Opportunity, the third element of the “theft triangle,” is the only one an employer has direct control over. No matter how great the need or how willing the employee, he can’t steal if the opportunity doesn’t exist. And this is where you, the employer, come in. This is where the battle between employer and dishonest employee is waged; where you have the power to keep honest employees honest, and identify and eliminate dishonest ones.

First, focus on choosing honest employees; then eliminate the opportunity for employees to steal from you. Here are some suggestions the small retailer should consider and implement.

Establish comprehensive hiring practices

Attracting and keeping honest employees begins with the application and very first interview. Always review the application before meeting a prospective employee for an interview. Look for and note irregularities such as gaps in work history, failing to list a former employer as a reference, frequent job-hopping, or missing information. Discuss these issues in depth during the interview to establish a comfort level with the prospect.

If the interview is successful and you want to pursue hiring this person, thoroughly check references and past employers—this is a vital next step. The reference check, which small business owners often overlook, is an important part of the hiring process because it helps identify potential problems in advance.

Many retailers feel that criminal background checks, credit checks, drug testing and written psychological tests that determine the prospect’s tendency to steal are useful tools. Various companies nationwide can provide small business owners with all or some of these services for a small fee. One of them, Employment Screening Resources (based in California) provides many of these services. You can find them on the Net at Esrcheck.com.

Create a rewarding work environment

Studies show a direct correlation between higher pay and reduced employee theft. According to the 1996 National Retail Security Survey, companies with higher levels of compensation than their competitors’ experienced lower inventory shrinkage levels. The data suggest that employers may be fooling themselves if they believe lower wages are saving them money. Saving a few dollars in wages can cost considerably more in stolen goods or revenue.

Your weapon against employee theft is to create a rewarding work environment. To do this, establish a fair compensation program, one that incorporates incentives for reaching goals in sales, profitability and shrink. In addition, create a program that recognizes employees for outstanding service with monetary and non-monetary rewards. You can also build loyalty by communicating with employees at all levels openly, regularly and constructively. Doing this empowers them to make positive contributions and to work as a team. All together, these steps create a culture that discourages dishonesty.

Use controls and countermeasures

The most effective way to eliminate the opportunity for employees to steal is through controls and countermeasures. Start with a comprehensive inventory-management system that enables you to check book inventory against actual inventory in your store or RMU, as determined through periodic physical counts. The more frequent the physical count, the better. Today, even very small retail owners are using computerized POS (point-of-sale) systems that track all incoming inventory and record each sale by means of barcodes or inventory tracking numbers.

Cash management is equally important in the battle against employee theft. You need to establish and adhere to strict policies that require reporting no-sales, voids, exchanges and refunds. Dishonest employees commonly use each of these to siphon money from the cash drawer. Computerized POS systems are capable of providing cash management as well as inventory control for retail owners.

Other controls and countermeasures include closed-circuit TV monitors (CCTV) or surveillance cameras that can monitor the sales area, check-out area and back room; mirrors and one-way windows; and burglar alarms. Burglar alarms can be used not only to protect assets from burglars; they can assign individual access codes to identify each employee who opens, closes, or re-enters the store. And, of course, uniformed guards can be an effective option.

Employees working alone are far more likely to steal. Your defense: double up. Schedule more than one employee on each shift if at all possible. In addition, don’t regularly schedule the same two employees, to avoid any potential collusion. Instead, frequently rotate schedules and partners.

Another effective deterent is to implement a handbag or backpack check at the end of each employee’s shift. This helps eliminate theft because employees don’t have a way to carry merchandise out of the store or away from the cart.

Finally, consider using a secret-shopper service periodically. This is an inexpensive and fairly effective way to spot and reduce employee theft. These services randomly send out people posing as customers to shop your store, sometimes in groups of three. They will observe your employees both in the sales area and at the cash register, looking for signs of dishonest behavior. Then they provide you with a complete report that details their observations.

Watch for warning signs

To prevent employee theft, it’s important for the owner and/or manager to stop in frequently at random times to check on the staff. When you do, look for the following warning signs of employee theft:

  • Excessive no-sales, voids and refunds: A high number of any of these indicated on the register “X” or “Z” tape are a sign that the employee operating the register is either opening the draw often to make change without making a sale, or ringing false refunds and pocketing the cash.
  • Coins placed on or near the register: Employees who put money in the till without ringing sales often track the amount of money they have built up in the drawer using coins as “counters,” with each coin representing a certain dollar value. For instance, if 16¢ in coins sits on or near the register, the employee might have an extra $16.00 in the cash drawer. In this example, the penny’s value is $1.00, the nickel is $5.00 and the dime is $10.00. The employee will pocket the $16.00 at or near the end of the shift. If you detect that this is happening—if you see stray coins—pull the cash drawer immediately and verify its contents against the “X” tape.
  • Unwillingness to take breaks: An employee who is unwilling or reluctant to take scheduled breaks may be afraid that, during the break, you or your manager will discover irregularities in the cash drawer or workspace that would identify that employee as a thief.
  • Big spending: An employee who spends “big” or starts spending bigger than usual, apparently beyond his or her means without explanation (e.g., wears expensive clothes or jewelry and/or drives an expensive car, etc.), should be watched closely. Of course, there may be a perfectly reasonable explanation for it—which is why it’s so important to communicate with employees and be open to them communicating with you. You’ll get to know their personal and financial situations better, and can gauge whether this situation merits close attention.
  • Friends at work: Research shows that employees collude with a high percentage of shoplifters. Beware of employees who always seem to have friends “hanging” with them during working hours. Institute a policy against it. (Similarly, have a policy that limits personal phone calls during work.)

By keeping on top of employee activity, you can significantly cut potential losses. Follow sound hiring practices… reward and recognize employees… take a few simple precautions that eliminate opportunity… and watch for the warning signs of employee theft. All of this is good management, and can all add up to a bigger, healthier bottom line.

Fred Delibero

Delibero is a regular contributing writer for SRR
Publications of ICSC

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